Charles & Colvard Ltd (CTHR) 2012 Q1 法說會逐字稿

Good morning and welcome to the Charles & Colvard first-quarter 2012 results conference call. You will be in listen-only mode for the presentation but there will be an opportunity afterwards for you to ask questions. Instructions will follow at that time. This conference is being recorded. I now would like to turn the conference over to Randy McCullough. You may begin.

Good morning everybody. I apologize for being a tad late here. We got hung up on hold. Thank you for taking the time to join us in recapping the first quarter and the year ending -- for March -- sorry, for the month ending March 31, 2012.

As I said in today's press release, I'm very pleased with the $500,000 gross margin increase of the first quarter of 2012 over the first quarter of 2011. The foundation we've been building the past 2.5 years is positioning Charles & Colvard towards building profitable long-term sustainable revenue. Towards this end, as we move forward in 2012, we are executing our growth strategy as planned with an increasing focus on innovation, investing in prophet of process improvement and increasing productivity, continuing to strengthen our portfolio of distributors and retailers, and addressing growth challenges head-on.

We have a solid executable plans in place to maintain our future growth. We believe our investments in Lulu Avenue and moissanite.com, while unfavorably impacting our bottom line today, have laid the groundwork to drive substantial revenue and profits in the near future. Our Lulu Avenue direct sales front-end and back-office systems went live earlier this month, which we believe is a significant catalyst in recruiting and supporting independent sales representatives as we grow the business. Check out the upcoming events scheduled in May and June at LuluAvenue.com.

We had over 120 people turn out at our launch event last week here in Raleigh where Ann Raulston did a superb job over-viewing the opportunities with Lulu Avenue. Our recruiting and training efforts will continue through the second quarter. We continue to anticipate that the third quarter of 2012 will begin the home party sales build and the fourth quarter hitting a stride to produce meaningful revenue.

Our growth strategy for Charles & Colvard, which we established two years ago, continues to be the right course because it inspires our people and our partners, focuses us where we believe the growth opportunities are greatest, leverages our core strengths, and continues to build on a strong foundation of jewelry manufacturing expertise, brand development, market expansion, competency, and, most importantly, innovation.

Innovation has become a driving force with Charles & Colvard's long-term strategy. It is our strong belief that price promotions may win a quarter here and there, but continually introducing new, exciting and innovative products wins decades. With that said, I feel our new premier brand of Charles & Colvard Created Moissanite, Forever Brilliant, a gemstone with optical properties that are remarkably whiter and brighter than ever before, opens a whole new chapter for moissanite sales. Consumers around the globe will be astonished at the transformation of our moissanite gemstones that is up to four color grades whiter. Particularly in Asia, where color has been the primary consumer objection, increasing our market share with the whiter gemstones is now a real possibility. I can't imagine a better platform for launching new jewelry brands that will provide an affordable luxury experience like no other.

In the interim, our new Forever Brilliant enhanced gemstone is getting a lot of attention within the jewelry industry here in the US. We have put together a marketing campaign targeting the upcoming JCK jewelry show in Las Vegas at the end of May, which is the largest jewelry industry trade show in the US, to announce the launch of Forever Brilliant. Our campaign includes a 12-page catalog designed to highlight the features and benefits of Forever Brilliant gemstone with an emphasis on the improvement of up to four color grades whiter. Five of our largest distributors are participating in the catalog that will be inserted into over 40,000 JCK show magazines targeting jewelry trade professionals at the show. In addition, Charles & Colvard will have banners throughout the show and an informational booth.

Additionally, we completed the initial stage of branding for all of the Company's entities that has yielded a refreshed look and logos. Much progress has been made this quarter and I'm happy to report that we are ready and moving ahead into the next chapter for Charles & Colvard, focused on growing our business and creating value for our shareholders.

There are multiple process improvement efforts underway throughout the organization. But the increased use of technology is the one providing major productivity enhancements. Our intention is for Charles & Colvard to harness the power of real-time business intelligence to aid decision-making. We are accelerating innovation by using technology to create visibility from jewelry creation to the store shelf, and we are standardizing our manufacturing system to integrate data that will enable us to manage the business in real time and on a demand-driven basis. We'll be able to work together more effectively and efficiently inside and outside the Company and we'll be able to interact with distributors, retail partners and consumers far more directly and frequently than we can today. Enhanced efficiency frees up resources to invest in innovation that helps drive top and bottom-line growth.

In addition, we continue to take steps to strengthen Charles & Colvard's portfolio of businesses, which enables us to focus our greatest growth opportunities. This is an ongoing process and we continually evaluate the strength of our portfolio by assessing our ability to apply the Company's core capabilities of product development, brand building innovation, consumer understanding, marketing and scale. Based on this evolution -- sorry, based on this evaluation, we believe that our current portfolio is the strongest it has been for many years and provides a highly strategic platform for sustainable growth.

Two years ago, we entered the finished fine jewelry business despite the Company's historical lack of experience with finished jewelry and its inherent difficulties with branding. Today, jewelry manufacturing allows us to focus our efforts towards consumers where we can more clearly apply our Company's strengths, and where there are opportunities to increase sales and consumer awareness.

Our largest customer is Jewelry Television, for which we produce all of the moissanite jewelry that it sells. And the growth in our Finished Jewelry segment accounted for all of our revenue increase in the first quarter of 2012. We expect our Finished Jewelry business to continue to grow and in addition our ability to produce jewelry supports all of our customer direct initiatives. We have completed reallocating our resources to these objectives and concluding incrementing a new jewelry-specific ERP system and putting a seasoned management team in place.

We also see significant opportunities to grow our wholesale loose gemstone business with the increased consumer awareness we expect from the exposure received from Home Shopping Networks, our consumer direct sales efforts, and exciting new product offerings like Forever Brilliant enhanced gemstones.

I want to conclude by looking forward and reaffirming my strong belief that we have the right purpose strategy and supporting capability to grow well into the future. The opportunities described above are a big reason why I am so confident in Charles & Colvard's growth strategy, but the most important reason of all is the most fundamental. Our strategy inspires extraordinary performance by everyone called upon to help execute it. When we commit ourselves to reaching as many as possible with the jewelry that makes them feel special and their daily experiences a little more fun, we inspire higher levels of performance. A strong sense of purpose focuses us on the consumers we serve and inspires compassion for them that in turn leads to innovation that drives growth.

The folks here at Charles & Colvard want to be part of something positive, something bigger than themselves. They want to know they can use their time and talents to make a lasting difference in people's lives. I am confident in their ability to be innovative in creating new ways to go to markets, grow in our existing markets, developing sustainable brands, and delivering the top and bottom-line growth that you expect from Charles & Colvard, and that we demand of ourselves.

We are committed to reaching as many as possible with jewelry that makes them feel special and their daily experiences a little more fun. We know that, if we do this well, we'll be rewarded with sales and profit growth, increased market awareness, a strong company reputation and ultimately the creation of value that allows our shareholders to prosper.

Now, I'd like to turn the call over to our Chief Financial Officer, Tim Krist, who will review in greater detail the financial results of our first quarter 2012.

Thank you Randy. Good morning everyone and thank you for joining us today. I will discuss the financial results for the first quarter that ended March 31, 2012.

As announced in today's press release, net sales for the first quarter of 2012 increased 40% to approximately $4.2 million compared with approximately $3 million in net sales during the same period of 2011. Domestic sales for the quarter increased 144% from the same period in 2011 to approximately $3.4 million and represented 81% of our total net sales. This increase was primarily the result of a significant increase in Finished Jewelry sales to a major Home Shopping Network customer.

International sales for the quarter decreased 50% from the same period in 2011 to approximately $787,000 and represented 19% of total net sales. This decrease was primarily the result of the addition of a new distributor in India with a large initial order to open that market, as well as increased sales to an existing distributor in India, both of which occurred during the first quarter 2011, along with the timing of restocking orders in the first quarter of 2012 from our existing international customer base.

Our loose gemstone sales during the first quarter decreased 4% from the same period in 2011 to approximately $2.5 million and represented 59% of total net sales. The slight decline in loose gemstone sales is primarily the result of the timing of restocking orders from a number of our existing domestic and international wholesale customers as they managed existing inventory ahead of the planned second-quarter rollout of our Forever Brilliant enhanced gemstones.

Our Finished Jewelry sales during the first quarter increased 319% from the same period in 2011 to approximately $1.7 million and represented 41% of total net sales. This increase in Finished Jewelry sales is primarily the result of robust wholesale Finished Jewelry sales, especially to television Shopping Network customers that are experiencing high levels of success as we continue to grow our Finished Jewelry business.

Our first-quarter comparable sales increased 37% when compared with the previous year. We define comparable sales as active customers with which we generate revenue during both periods and which we are reporting. We use this as a metric to measure our sales growth with our existing customer base.

We recorded a net loss of $376,000 or $0.02 per share during the first quarter of 2012 compared with a net loss of $236,000 or $0.01 per share during the first quarter of 2011. This net loss was primarily due to higher production overhead and operating expenses associated with our jewelry manufacturing and direct-to-consumer moissanite.com eCommerce and Lulu Avenue home party businesses.

Operating expenses totaled approximately $2.9 million in the first quarter of 2012 compared with approximately $1.9 million for the same period of 2011, an increase of $989,000, or 53%. Of this increase, sales and marketing expenses increased $821,000 or 120% when compared with the same period in 2011. This was primarily due to our investments in marketing and branding initiatives to better position Charles & Colvard's product lines in the marketplace as well as a full quarter of expense relating to the key strategic personnel additions made in the latter part of 2011 in support of our moissanite.com and Lulu Avenue lines of business.

We ended the quarter with a slightly higher level of cash and liquid long-term investments on our balance sheet relative to the end of 2011. Cash and liquid long-term investments totaled $10.6 million at March 31, 2012, up from $10.5 million at December 31, 2011.

We generated approximately $384,000 in cash from operations during the first quarter of 2012.

Total inventory, including long-term and consignment inventory, approximated $34.6 million at the end of the first quarter, down from $35 million at the end of 2011. This decrease is primarily the result of sales, offset in part by purchases during the quarter of jewelry castings, bindings and other jewelry components, fashion finish jewelry and support our home party direct sales business, and production of moissanite gemstones.

I would now like to turn the call back to Randy.

Thanks Jim. This concludes our formal remarks this morning. Now, I would like to open the call to any questions that participants in the call may have. Operator, can you please open the floor for the Q&A session?

(Operator Instructions). [Mark Wright], private investor.

Hi Randy. Good quarter, thank you. A couple of questions for you here. The loose sale decrease, we are saying that's because our wholesale customers are waiting for their Forever Brilliant stones? Those should be coming through in second quarter?

Yes. We first started the process of shipping our stones out to Serenity, and that requires a three-pronged process because they go to New York to be laser-inscribed on the girdle. We've built up in excess of 10,000 stones today over the last six -- five or six weeks. We are working toward fulfilling the orders of our three largest distributors, which we should be able to complete within the first or second week of May and have everyone up to speed by the time we kick off the campaign the first week of June in JCK.

All right, so not just merely a timing issue, we should see those loose stone sales increase here in the second quarter I would expect.

Yes, and rightfully so. They didn't want to continue to load up on the VG, the current quality. They had samples, and I can tell you they are all ecstatic about the new stone. That's where they want to drive their inventories. I think what it really sends is a great message that, when you look forward, I am hopeful that some year and a half out from now we can migrate toward the branded Forever Brilliant as being our exclusive product that's really our only product out there. It would be a great position to be in, come 2015, when competition comes in.

All right. One more question for you. The coating issue for Forever Brilliant, did that get resolved via sending a stone to GIA and getting the results back?

There is absolutely no coating. Here's what we have done. We took and repolished a group of stones. Bob Curry, who is on staff with us, over the manufacturing, is a GIA graduate gemologist. There's not very many of them in North Carolina or any other state. Bob has inspected every stone, so that was our internal -- we even sawed the stone in half. That was our internal to conclude that the process it goes through is throughout the stone and that there's no coating. Obviously, if we polished off all the facets, if there was a coating, it would've been gone and the stone would have went dark.

GLA, the Gemological Laboratory of America, out of California, was the first to come back with, in writing, that they had run their series of tests on several stones. We actually posted those on our website -- or we are posting them. They'll be -- we've got a posting going on Facebook that's going to have a link to go to our website and see those.

I have been in communication with Jerry Ehrenwald, who owns IGI, International Gemological Laboratory -- I mean International Institute -- International Gemological Institute, and they have confirmed also that there is no coating. He is just working in conjunction with GIA to be sure that their statements are consistent with one another. The stone is not coated, believe me. We know.

That's great to hear. It will be good to put that issue to rest when you post that link on your website.

I'll tell you, the most amazing thing is, as we go through this process, these stones that are coming in today are about one color grade whiter than where we started initially, because the process just keeps improving. Those guys out there are doing a fabulous job.

That's good to year. Last question for you here, the Judy Evans Collection. Is that still coming?

Yes, we have samples. What we have done with those, we've shown them to various companies that we do business with. We are going to be having some conversation at the show, and continue to work on that. I can tell you, this Charles Winston has just hit the ball out of the park. And unfortunately for Judy, he kind of took over all of our resources, because not only is it a home run with JTV, but Quality [Goal], one of our larger distributors, is setting up a 400-piece line they're going to all the independents and out to the Caribbean with of his particular jewelry, the Charles Winston line.

Rick Fetterman, Fetterman Investments.

Good morning everyone. I wonder if you can comment on -- with the rollout of the new Forever Brilliant gemstone, do you still think the $27 million in long-term inventory, is that -- should that be valued at full value?

This is Tim. We continue to believe that our inventory should be valued at the full cost. One of the things that -- Forever Brilliant actually takes our existing inventory and just enhances it, so it doesn't in any way make it obsolete. The added benefit to the Forever Brilliant treatment is it actually takes some of the stones, some of the fancy cuts that have been a little slower moving because of color and now makes them more salable, in our view. We actually expect that we will increase sales of some of those stones. Historically, our biggest seller has been our Round Brilliant. So we see a significant upside in moving some of that from the fancy-cut inventory, if that answers your question.

It does. It does. Do you -- additionally, have you had any pushback at all from retailers or distributors as a result of selling finished jewelry? I know you commented on this in the last call, but I just think it's worth an update.

Yes, none that I'm aware of. It's -- and you're talking about selling wholesale finished jewelry to the JTBs of the world, the (inaudible) and Ultra Diamonds, or are you talking about what we're doing in Finished Jewelry on our website?

That would be -- the one that has more potential of raising concerns is our website, but I think they've reached a comfort level that we are not going to undermine the trade that our pricing is in line with where everyone else is at. We are actually working with an exclusive provider of jewelry for our website that has designs -- while some of them are very similar, there's a lot on there that's very different from what's out there with the other retailers.

Okay. So you're not selling apples to two different -- via to different channels? You've got an apple and an orange that you're selling.

Yes. The only exception would be a basic -- like a stud earring. But again, we are making sure that the stud earring that we post on our site doesn't cannibalize their product offerings on other sites and in the stores.

My last question is could you comment on the -- you just mentioned the Internet sales. What kind of activity -- are you still seeing growth there?

What we don't do, obviously we don't give sales information yet in those categories. That's something, when it's appropriate, we will break those two subs out, being consumer direct, which is Lulu, and the moissanite.com. But we are pleased. The traffic -- what we monitor is traffic count. We've started campaigns to -- we've (multiple speakers)

(inaudible)

Craig just gave me the thumbs up. For the month of April, now, granted we are spending some money on some campaigns, but our traffic count is up 70%. That's significant. Then it just becomes a conversion rate, how much of that traffic can you convert to an actual sale.

Thank you very much. Keep up the good work.

(Operator Instructions). Neal Goldman, Goldman Capital Management.

Based on your outlook, how much of that long-term inventory would you expect to come down by year-end?

You always ask that question every quarter.

I'm looking for an answer.

That's fair. Actually, we have -- as I think I've explained before, we don't actually specifically identify. It's an accounting formula that, based upon our next 12 months projected costs, what will we move to move it up to current?

We do have a bit of a dynamic going on and we are actually cutting stones we are running out of, so we are adding to our inventory while we are selling it down to fill in those gaps we have in adjacent sizes. We also expect that, with the introduction of Forever Brilliant and the enhancement of some of these fancy cuts, that we'll increase the sale of those as well.

So as of right now, I can tell you that we -- in the press release we put out today, we are projecting our current inventories now about $7 million, which has moved up somewhat from the end of the year. We reevaluate that every quarter.

Now, if we get significant sales increases the next three quarters, then that number will continue to grow. Assuming that a significant portion and I expect that would be a significant portion is sales of existing inventory as opposed to the purchase of, say, Lulu Avenue fashion jewelry that we buy and sell in the same period. But I think we will have a decent dent in our inventory by the end of the year.

And will that inventory be at full margin?

Yes.

Okay. All right. Conceptually -- I realize, as you grow the business, your current inventories will continue to climb. But in terms of the timing, if you're successful on Lulu, and I assume some of these stones in the long-term are marketed through that -- how many years would it take us to really get rid of all the long-term inventory, or the bulk of it?

That's a tough question to answer because there's a lot of dynamics involved with not only the revenue in absolute dollars but also the make-up of that revenue.

Okay.

But --

And how much we can drive it increased revenue coming forward (multiple speakers).

How much of the long-term inventory are stones -- what percentages are stones that you're going to convert to the Forever Brilliant kind? Is it 20%, 30%? What?

What we are doing is we are taking the best-selling stones, based on the data that we are researching, and then in addition to that, obviously we have orders in-house from the major distributors. We are making sure that we are focused on those first, build an inventory to support that. When I say build an inventory, it's just converting, like you said. Then we look at the stones that have been the slowest moving stones. I'll give you an example.

We have a gorgeous -- I guess it's a modified radiant kind of cut, and a princess, that it's a beautiful stone. It's just the corners -- when you go out to those little square quarters, they accentuate the color and the normal VG. The guys at Serenity have really -- it's unbelievable -- as good as they've done with the round stones, they've even done the square stone better. We're excited about taking that to the show. We sent samples to our distributors and they got excited enough to increase their inventories in those categories. They're going to be mounting up jewelry to show at the show. That really will be -- it's an old stone with our inventory, but to the retailers out there, it will be something fresh, new and exciting because, again, it just makes a gorgeous piece of jewelry. So we are looking forward to taking some of those shapes that we have been -- to be honest with you, we've kind of been embarrassed to show them. Now, we can take them out there and say, "Hey, guys, you've got to look at this. This is just phenomenal."

Couldn't some of those stones be marked down even further because they have been slow moving, and therefore there is an incremental potential benefit in terms of recognizing profitability?

When we look at them to the marketplace, and the marketplace being that we are trying to maintain that 1/10 of diamonds, it's going to be a real value where it's at. It really is. I am confident that we are going to be able to move these.

If we had to do something, rather than take markdowns, what I like to do is work with a large user, and do some kind of a co-marketing program. So, I would come back with them with some kind of a marketing support based on their sales, based on their purchases, and try to work in that direction.

Thank you. Great quarter guys.

Noah Steinberg, G2 Investment Partners.

Josh Goldberg here. How are you doing? Just on Lulu Avenue, can you give us just a sense of the timing in terms of when you think you can recognize initial sales and some of the staffing that you are planning for by the end of the year?

Yes, when you say staffing, I'm assuming you're talking about the representatives that would be buying the kits and selling out in the field.

That's exactly right.

When we went through the test phase, if you remember, we said our averages were between $900, $1100, so call it $around 1000. And when there are significant numbers out there selling, if that drifts to $900 or it could increase, but just for argument, say it's $1000 a sale, or per party. I would be hopeful, based on research that I have done with Stella & Dot and Silpada and a few of the others, that the representatives would average at least one show a month. So you can just kind of back into the math to get to sales. It's all a multiple of how many representatives you have.

Kevin and Ann have -- now that they have the support of systems in place, because these representatives are reluctant to leave a home party business that they currently have and change it or even augment it to Lulu Avenue's offering, unless they have all the support that comes through the Web.

Absolutely.

And it's not just pictures. I mean the support goes to some marketing campaign, it's all the back-office support. They are able to go out and from e-mails to various ways to communicate with their customer base, and they are also able to track their commissions and has automatic responses to those that are opting in or not opting in to come to the party. It's just a host of tools that they are able to use, including customizing their own website to some degree. So with that in place, now they are able to go out, and that's just ramped up. That campaign was really kicked off formally last week. Again, if you go to the website, you'll see that they've got several of those campaigns scheduled over the next several weeks in various cities.

I don't want to put a number out there because our competition is also watching what we are doing, and I don't want to give them anything that they could use against us, but I am optimistic that we are going to be right on track with what my expectations were and what we planned and budgeted for. With that said, that means that we get a build up in the third quarter and the fourth quarter we really start to see some results that hit the topline and the bottom line. That would show throughout the Company.

Randy, does the home parties have any sort of seasonality to them or maybe the fourth quarter it's sort of more popular as people buy things for the holidays, and then first quarter it could be down a little bit or do you feel like, once you kind of hit your stride and build the fourth quarter, you can see sequential growth every quarter for the foreseeable future?

Josh, you're going to get a treat. I'm going to let Ann talk to you about it.

We really sort of echo traditional retail in that regard. Yes, we get those summer months where things get a little bit slower, and that's why we really ramp up our campaigns then. We're very confident that we, with our moissanite mix and Lulu Avenue, have a fabulous way to reach out to people who are looking for graduation gifts, bridal gifts, bridal shower gifts, etc. etc. So that is an advantage that I believe we have over other direct sales companies in the same avenue -- no pun intended on the Avenue. But absolutely. So you'll see us echoing traditional retail, but then I think we also have, during those traditionally slower months in the summer months particularly, we have elements that other direct sales companies don't have to reach out to our customers.

Great. As you know, we've been following the story and we are very excited about the expansion opportunities with Lulu Avenue. Keep up the great work.

We appreciate the support, Josh.

Mark Wright, private investor.

Can you tell us the expected profit margin for Forever Brilliant stones versus the normal moissanite stones?

That would not be something we normally do, but it's in line with what we have done historically.

Okay. All right. And --

The reason, Mark, I want you to think about it for a minute. Because what we are trying to do is protect your investment. If we make our profit margins known to the distributors that we are in big, big negotiations with, that could turn around and bite us. So, we have to be cognizant of the fact that these guys are listening too.

Sure. I just figured I'd ask the question to see how it would compare.

Yes.

So I'm thinking it's going to be about the same. I know that B stones are going to cost more because you're having to pay Serenity.

Yes.

You've got to make up for that. So --

Yes, let me tell you. We negotiated a really good deal. You'd be proud of us if you saw the numbers.

All right. I would expect I'll get the same answer but I'll ask this. In the future, would you break out the revenue from the FB sales versus the revenue from normal M?

Probably not, just because we wouldn't be managing the business by Forever Brilliant. We do segment reporting, so down the road, we very likely may separate our subsidiaries out. But I don't think we would be breaking out our Forever Brilliant specifically.

Yes, we have that visibility here, but, again, I'm going to reiterate. I would not be surprised if 1.5 years from now that Forever Brilliant was our only sale, that we just phase out the VG. It's that much nicer and it's not that much more.

[Bob Jackson], private investor.

Good morning. Great job in the quarter. Just a couple of questions. The jewelry TV, do I gather, sort of inferring from your press release and from the comments from your CFO, that they accounted for substantially all of the increase in sales?

That is true.

Okay. What do you owe that to? Is it sort of a one-time maybe publicity thing that they did, or -- I guess the concern is is that kind of increase sustainable?

That is a great, great question. I can tell you, and this is a combination of conversations with the folks over there and our sales team -- when we started with JTV -- and I'm trying to think the first time I went out to Knoxville with Tom, over a year ago -- they were very excited about getting into moissanite and getting on their shows. They told me then that moissanite to them could be what Diamonique has been to QVC. When I left with Tom, I said, "Boy, that would be nice, but don't hang your hat on it. Let's just focus on getting some sustainable sales, something that won't be a one-time, something that we'll get repeat business on."

They have really -- they have latched into -- they've got a great repeatable loose stone business. They've got a great repeatable business they do under Charles Winston that the brand is Fire, and then they do the higher end in the Fire being in silver. They do the 14 karat higher end look under Elite. All three are just knocking -- all three are setting records for their hourly sales. And the last time Charles was there a couple of weeks ago, they did -- they were scheduled to do six hours I think they ended up doing eight hours. And in that eight hours, they sold it, at their selling price, over $1 million. That just don't happen. I mean they are ecstatic. They've already yesterday or day before I got word that they've added two more hours to our show schedule in June, and they are going to be significant for us. They are doing a great job with it, they believe in it.

In that show that they ran a couple of weeks ago, they also did a segment where they feature the green. The green is something that we have focused on bringing to life. It's the bottom of the bowl when we polish the stones here and it's accumulated over the years. But we went to them; we went to others too. We showed the green to a lot of people and we manage some jewelry and put it on our website and we've had some response, but I mean it's spotted. They came in, ran a test show. It did phenomenal. They ran the show as weekend, just phenomenal the amount of green they sold. And they have committed to take all of our green. I mean the number is big that they are working through.

That's awesome. So I'm gathering from your reply that you do, barring unforeseen events, you do expect those sales with them to be sustainable. It's not sort of a one-time for this quarter.

No, they are on an incline. I don't know where the peak is at. I mean it's -- every quarter is substantially higher than the preceding quarter and they just keep getting behind it more and more.

The best thing about it, I can tell you, they are really, really good people to work with. We like them a lot. They have several factories that they have some control over in Bangkok. We actually coordinate our trips to Bangkok with them with our merchants and work side-by-side with them. In Hong Kong at the shows, we work side-by-side with them. We've got some time allotted together here at the JCK show, and then we are out of their office at least a couple times, if not more, a month.

That's great. So the second question is your competitors over at Better Than Diamond, they have on their website -- I'm a little confused because I thought the moissanite came from you guys, but leaving that aside -- they have on their website under Amora moissanite, it is independently graded at an average of four color grades whiter than regular moissanite by Charles & Colvard. So my question is now that you guys are doing the Forever Brilliant, which is four grades whiter, does that mean you're is now going to be equal to or perhaps better than theirs?

Yes, we just have two different processes. They buy from our distributors. We sell the VG stone to our distributors. They buy from the distributors the VG stone, and they, based on what they put on their website, they subject it to a HPHT process. HPHT is high pressure high temperature. It's used with type II brown diamonds. Remember, brown diamonds or any diamond, the hardness, even though it's just one grade on the mole scale, it's still substantially harder, almost twice as hard physically internally, the structure of it, as moissanite. It is what it is. Moissanite is much harbor than ruby or sapphire. So there are some inherent potential issues with HTHP. It works, it really does, because moissanite inherently has similarities to type II brown diamonds. And so -- we knew this. We've worked that process also when I first came on board. Obviously, I've been 40 years in the diamond business. But I was concerned about the results. When we do -- do pressure test on prongs when we set stones because we are concerned about the chipping that could happen, and I just couldn't get comfortable. I knew what Serenity was working on through others, in other types of stones, and just kept reaching out to Jay and Sunita, his wife, to see if we could make that process -- it's an inherently different process. It does use high temperature, but it doesn't subject a stone to incremental high pressure. It's been extremely effective.

Is it whiter than theirs? I know we're getting Gs back, and the old stones are in the J color range, and some of the new stuff that's coming in I think is even going to be higher. We continue to monitor it. Like I said, we do have a graduate gemologist on staff. We make sure -- we actually just hired another graduate gemologist that starts I think the end of the month, another week. We have a very sophisticated lab here. It's not a little back-office thing. We have some of the most modern equipment that GIA and others put out. We continue to look at our product, continue to work side-by-side with Serenity, at ways we can enhance it and even make it better.

But I know what we have and what we have is real. It will last for generations, and it's the best thing that ever happened to moissanite. I would think the fact that we are the source, and that we have very controlled costs, that we will be able to bring this to market and sustain it in market, not only in quantities that are needed to drive a real brand, but also at price points that will be advantageous to the consumer and to the retailer.

Understood. And so given that you are supplier to them for all the reasons you mentioned, that makes more sense. But if I understood what you're saying, so it is -- would the Forever Brilliant probably going to be comparable to the Amora, but may have better durability qualities.

Yes, and I don't want to get into a match going back and forth with those guys. They are doing their thing, and more power to them. We are the source. We know what we're doing and we going to make sure that our product going to market is always superior. Like I say, 18 months from now, if the only thing we are putting out there is Forever Brilliant, how can you even have a sustainable position against it?

Understood. So the last question is have you had any communications at all with Ardis, who I think at this point owns about 15% of the Company, in terms of what their thought or processes or interest -- I know at one point you had said that you had reached out and hadn't made any progress connecting with them.

You know, Stuart runs the company, and Mike is assigned to our investment. I actually went out and spent a few hours with them, and we had a great conversation. I can tell you that their thoughts are right in line with where my head is at and where I see the Company going. They are phenomenal supporters. I'm not going to disclose our conversation because that would just be very unprofessional to them. But they are a great, great -- we couldn't have a better company owning our stock.

That's great. They're in alignment with you guys in terms of the long-term growth and possibilities of the Company?

Yes.

Okay. Thank you so much.

Mark Wright, private investor.

Looking at the henriandnobel.com site, which I assume is yours, I see lots of colored stones out there. Is that colored moissanite?

First off, that's a test program. We are constantly looking at ways to extend our reach for consumer awareness, for driving incremental revenue and incremental profits. I think I even mentioned to you guys last year I would love to do something in a small footprint in some kind of a store that could be a franchise operation. henriandnobel is a trunk show test program that we are doing. We're just showing a lot of different things in it to see what works and what doesn't work. So don't get excited about that one.

Can you tell me if it's colored moissanite or are they just other stones?

No. Currently, it's other stones, but we are working with Serenity to offer various colors. You're going to see it on JTV is the reason I bring it up. They are going to run -- we are not quite finished yet, but they are going to run a color for Mother's Day potentially, exclusive color that we're going to do for them.

Serenity does have a process, and it's been used by a few of the e-tailers in the past, but now we have exclusive rights to that process for the next five years. They actually -- it's not just painting on a coating or adhering a coating. It actually penetrates the surface of the bottom of the stone. We call that the pavilion. We are working it. We are testing it. We're looking at -- we have literally hundreds if not thousands of stones that we've been working with here. So we will be offering something. The long and short of it, we will be offering something probably in the fall that has various colors.

Thank you.

Rodney Baber, [Aaron] Capital.

Can you hear me okay? Listen, great continued job in taking the Company forward. Appreciate what you guys are doing.

Congratulations on your new office, by the way.

Thank you for noticing that. Glad to be here. A couple things. Is Kevin with us today?

He is.

Okay. We are talking a lot about product and quality out and all those kind of things, but I'd love a little more color on how you build up the sales force. I think you mentioned in your release that you -- 120 people showed up for a kickoff meeting in Raleigh. I would be curious about how that went. Were they there for Lulu Avenue? Were they there for HenriandNobel? But I read about Stella and Dot having 30,000 reps and other companies having tens of thousands and many, many companies like that. And they ramped up over a period of time. I would love to hear a little bit more about how that will happen, and also if there's any clarity you can give on your comment that the third quarter we begin to see that. I mean that would indicate X number of people. And then meaningful revenue increases in the fourth quarter, which would indicate more people added. So anyway, that's a long-winded question, but if Kevin could give us some feedback on that, I love to hear it.

I'm going to let Kevin do that. But I'm going to remind you, one, he can't give forward-looking statements, so if he gets into the numbers, either Tim or I, one is going to be -- whichever one is closest is going to kick him. But just to give you some -- and you know me well enough to know that, one, I like to have -- I like to hold as many aces as I can. I'm going to remind you and all of you guys that, when Kevin was putting this together, he reached out and found the original marketing director for Stella and Dot, who was with them the three -- I think it was three years of their initial launch. So we know what their ramp-up pattern was. We know a lot of that. It's just intel you get when you bring on board seasoned veterans. So we are obviously using all of that in our program to position ourselves.

With that, I'll let Kevin talk to it little bit.

Thank you for the question, Rodney. It's good to hear you again. It's a very good question and it's one that to say I'm looking out in the future, and here's what's going to happen, I just can't do it. I can tell you what activities we are going to plan and how things have gone so far. So I will focus on that.

On the 12th of this month is the day the systems came up. So we are just at two weeks. Last week on Thursday night, we had an event. We asked the employees to come if they wanted do; a number of them did and brought some family and friends. But over half the group -- we thought maybe 30 or 40 people would show up. We had about 120 people there, and more than half of those were guests, just visitors who showed up, people who knew about moissanite. The whole event was for Lulu Avenue. It wasn't for anything else. It was to basically launch it here in our hometown. We are now e-mailing and phoning the people who were at the event and doing the follow-up that we promised we would do, and we have also done other events. We did one on Tuesday in -- Ann, was it Idaho Falls?

Yes, Idaho Falls.

It was in Idaho. It was Idaho Falls. That was great. We believe we've got 10 people joining just from that one event. That's a really good event. It takes those things, it takes you shoulder into the work for a couple of years to get this built up. The trick is just hard work, clear communications, and helping the field know how to sell, learn how to sell and build a team. And so I think we've got the right people on board.

In regards to Q3 and Q4, I think the story has always pretty much been, hey, let's build the team in Q4; let's put the pieces together in Q1; let's build a foundation in Q2; Q3 starts to show some numbers; Q4 we really start adding to the bottom line. Whether or not it's a massive number, it all depends on what the rest of the business is doing. I think we are happy with where we are going, and I think that's good.

One of the things I want to let you know is we started just last week a product called IMN, which is -- it's called " I Make News". But it's a very large e-mail service out there. It creates portals for a lot of the direct-sales companies. Our first e-mail went out just yesterday starting that out to our style advisors. They have already, just since we told them about it last Thursday night -- or sorry, last Wednesday night -- put in nearly 1000 contacts into the system. So it's starting to lever. It's just going to take us some time.

If you fast-forward it two years from now, would your growth come from you guys putting on things like Idaho Falls where you sign on 10 new people, or would it come from the viral aspect of this, where people that are selling it tell their friends about it and they get excited, and they see the opportunity to make money and they start selling it? How would that break down? Where does the real growth come from?

It's a combination. But it's really the viral piece. One of the challenges in this, and I'd be remiss if I made it sound easy, it's not it's a matter of working names on a list and going and doing it. I've talked to people who helped very successful companies go in, and we said, hey, we are going to have a beachhead of new people in Seattle. They may not get to their first person until they have been there three times. Some of those companies are now well in excess of $100 million in revenue, but it took them three trips to get one person to sign up in a city. If they quit too early or they don't learn from what's not working actively, they fail. And the ones that learn and keep to it, they tend to succeed.

We think we've got a great product mix, love the team we've got assembled, and love the support here at Charles & Colvard. So I think we've got what we need.

Terrific.

Hey, Rodney, my daughter got so excited in Austin, Texas she signed up. She is selling this Lulu Avenue stuff. (multiple speakers)

(multiple speakers) I'm talking about my wife doing some henriandnobel shows, because that seems to be a great opportunity too. Will people come in under Lulu Avenue and segue over to henriandnobel? Do they come in for henriandnobel, or how does that work?

I think, as we mentioned, that's a trunk show task that is going on, and really we are not pushing much information out there. It's a completely separate test.

Let us gather some data on it first, but we sure would like to get a test show out at your place.

Great. Listen, second thing for your Randy. For those obviously that have been following the Company for some time, we are aware that the international effort in Asia has been challenging because -- and you mentioned it in your comments today -- that they have a clarity for a color issue. They want something that is very white. In fact, they have been diamond snobs over there. So that's been a difficult market. But now, with you solving that problem, if Asia actually opens up and starts buying moissanite instead of a diamond, which I'm under the impression that diamond costs, wholesale loose stones have gone from like $4000 or $5000 for a high quality diamond stone up to $7000 or $8000, and that's been driven by China and India just grabbing all the inventory that's out there. So anyway, can you talk about what could actually happen with Asia and how you're feeling about that part of the business finally really getting some traction here?

What I can tell you is the conversations I've had with our distributors over there. [Aaron Shrum] is probably the largest. He's also one of the largest jewelry manufacturers in Asia. His offices operate out of Hong Kong; he has factories in various cities in mainland China. He -- we sent him some samples of the stones, and he called back and I can tell you he was absolutely ecstatic. He actually has some moissanite stores. I think I told you guys earlier we visited one in Beijing last year. When Tom and I were in the store, the seven employees that we gathered together, one was interpreting for the other six, they said they loved the stone, the customers loved it because they could get so much bigger stone. Every -- the majority of what they sell -- their middle class is growing at such a high rate, it's actually going to exceed our middle class probably within the next year, which means they've got more disposable income. That's why there's so much consumption over there not only for diamonds, for jewelry for a little bit of everything. But when you're go into a department store over there, you go into a jewelry store, the average size that you see in a ring of jewelry, a diamond is like a quarter carat, a third of a karat. You rarely see a one karat stone. One karat is what you were making reference to -- has migrated from about $4000 to over $7000 for a decent stone. That would be compatible with our Forever Brilliant in color and clarity.

So those employees told us "Everything is great, but the color -- why can't you make it whiter? " That's all they kept saying. "Why can't you make it whiter?" So specifically we asked Aaron to mount up some jewelry and take it to that location, and pull out everything that's in there and let's use that as a test to see what the -- what consumer response could look like there. Then obviously we are having other discussions in that region, including a television home shopping network that's there. I think it's going to be huge for us. I'm looking forward to going to the fall show, Hong Kong. That's where you get to sit down with all these guys. They're very formalized in how they do business. You can't just show up and knock on the door. So we are sending samples so that it's kind of teasing all these folks so we can get meetings scheduled for the upcoming Hong Kong show. I'm very optimistic, very, very optimistic on what this will open for us in the Asian market.

We haven't been talking about that much, and I know it's something that's got a huge potential. I want to ask you how you could size that market for us, but I don't know if that's something you've got numbers on. But if you could give us a feel for how big the Asian thing could be relative to the world market or something, I wouldn't mine hearing that. But if not, thanks for the answer, and I appreciate it. Good luck.

Yes, I'm actually looking at some data that a couple of guys who specialize in that area are putting together. When I get it, we'll put it in one of our reports.

Super, thank you. I'm pretty excited.

Yes.

Thank you. I now would like to turn the call back over to management for any closing remarks.

Thanks. Once again, I'd like to thank everyone for taking the time to participate in the call this afternoon. I hope that you share our enthusiasm for the remainder of 2012, and we look forward to talking to you again at our annual shareholders meeting here in Raleigh in a few weeks, May 17, 2012. You'll actually be able to see and touch the Forever Brilliant and compare it to the VG. So try to make it if you can. It's Sheraton and there's actually information being mailed out as we speak that you should get next week.

Thanks again, and that concludes our call.

Thank you. You may now disconnect your lines at this point in time. Thank you for participating and have a nice day.